On Tuesday, a significant event took place as investors rushed towards safe-haven currencies. The U.S. dollar, Swiss franc, and Japanese yen became the focal points as Russia issued a revised nuclear doctrine warning. President Vladimir Putin's move to lower the threshold for a nuclear strike after the Biden administration allowed Ukraine to fire American-made long-range missiles deep into Russia set off a chain of reactions in the forex market.

Impact on Yen and Euro

The yen witnessed a notable jump, surging 0.5% against the dollar and 0.8% against the euro. It reached its highest level since October 4 at 161.50. However, since October, the yen has fallen by approximately 7% and had weakened past the 156 per dollar level for the first time since July last week. This has put traders on high alert, expecting potential intervention from Japanese authorities to stabilize the currency.The Swiss franc also showed strength, rising 0.3% against the euro to 0.9325 after hitting 0.9305, its highest since early August. These movements in safe-haven currencies highlight the market's response to geopolitical tensions and the search for stability.

Forex Strategy and Market Sentiment

“Athanasios Vamvakidis, global head of forex strategy at Bofa, pointed out that this is a typical risk-off move in forex following the Kremlin statement. The market has been relatively complacent regarding geopolitical risks and has been focusing on other themes. Positioning has been long on risk, and it has become even more stretched after the U.S. elections,” said Vamvakidis.The greenback has been on an upward trend this month, rising more than 2%. This is supported by reduced expectations of Federal Reserve (Fed) rate cuts and the belief that U.S. President-elect Donald Trump will adopt inflationary policies. The dollar started the European session with a small rise as investors closely monitored Trump's search for a Treasury secretary. Among the names being considered are Apollo Global Management Chief Executive Marc Rowan and former Federal Reserve Governor Kevin Warsh. Analysts have noted that Warsh is perceived as less protectionist than the other candidates, and the growing likelihood of him getting the job may have contributed to the intra-day Treasury rally on Monday.

Treasury Yields and Market Expectations

U.S. Treasury yields edged lower on Monday as traders digested a still-strong U.S. economy and the likely policies of a Trump administration. “Given the large budget deficit, a candidate that offers less of a counterweight to some of President-elect Trump's plans could lead to a sell-off in the long end of the U.S. Treasury market and potentially soften the dollar as well,” said Chris Turner, head of forex strategy at ING. Markets expect Trump to cut taxes, which could increase the budget deficit.“The increasing likelihood of former Fed Governor Kevin Warsh as Treasury Secretary is reassuring for market participants as he could help rein in some of the more disruptive parts of Trump's policy agenda,” said Lee Hardman, senior currency analyst at MUFG.Investors are also awaiting the euro area's negotiated wage figures due on Wednesday and regional purchasing manager surveys on Friday. These events could be crucial for the European Central Bank (ECB) decision in December. Markets are fully pricing a 25 basis-point rate cut, and there is a slightly less than 20% chance of a 50 bps move, according to some analysts.On Monday, two top ECB policymakers signaled that they were more concerned about the damage that expected new U.S. trade tariffs would cause to growth rather than any impact on inflation. As a result, the euro dropped 0.4% to $1.0553, mostly due to the risk-off move prompted by Putin's warning. It hit $1.0496 last week, its lowest since early October 2023.Elsewhere, the Australian dollar last traded at $0.6494. The Reserve Bank of Australia provided indirect support by reiterating that interest rates were unlikely to be cut soon and might even need to be raised in certain scenarios.